Research Note: Consumer Heterogeneity and Competitive Price-Matching Guarantees

Yuxin Chen; Narasimhan, Chakravarthi; Zhang, Z. John
June 2001
Marketing Science;Summer2001, Vol. 20 Issue 3, p300
Academic Journal
Price-matching guarantees are widely used in consumer and industrial markets. Previous studies argue that they are a marketing tactic that facilitates implicit price collusion. This is because once a store adopts this marketing tactic, its rivals can no longer steal its customers by undercutting its price, and hence they have little incentive to initiate price cuts. While a store with price-matching guarantees has no fear of losing customers to rivals' price cuts, it has every incentive to raise its own price to charge a higher price to its loyal consumers. A growing body of legal literature uses this argument today to justify calls for antitrust actions against stores employing this marketing tactic. However, this theoretical conclusion baffles practitioners and industry experts. In practice, sellers typically embrace this marketing tactic in response to heavier competition and a growing bargain consciousness among shoppers. The introduction of price-matching guarantees by a store is frequently interpreted by industry observers as the initiation of a price war rather than a signal of price collusion. This assertion is supported in many instances by the fact that stores that introduce price-matching guarantees also roll back their prices and typically suffer subsequent loss of profits. Most ironically, the favorite examples used by researchers to illustrate how price-matching guarantees can enforce price collusion, Crazy Eddie and 'Nobody Beats the Wiz,' have subsequently either gone bankrupt or filed for federal bankruptcy protection. In this study we show that price-matching guarantees can indeed facilitate competition: The expected prices and profits can be strictly lower when all stores adopt price-matching guarantees than when they are not allowed to. This is because the adoption of price-matching guarantees generates not only a competition-dampening effect, which has been recognized in the literature, but...


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